Diageo Profit Drops 18% on Weak North American Sales

Bottles of Smirnoff vodka on a bottling line at Diageo’s North American bottling facility in Plainfield, Ill. The U.K. drinks maker said weak North American sales weighed down its first-half earnings.
Photo:
Bloomberg News

LONDON—
Diageo
DEO -2.00%
PLC said it was yet to feel any benefit from the improving U.S. economy as demand cooled for many of its major liquor brands across the world and first-half profit fell.

Sales of Johnnie Walker Scotch whisky, Smirnoff vodka and Captain Morgan rum—Diageo’s three biggest brands—posted global declines in the six months ended Dec. 31. Scotch, which makes up more than a quarter of Diageo’s total sales, fell 6%. The company said challenging conditions in China were partly to blame.

In North America, by some distance Diageo’s biggest and most profitable region, sales declined 2% in the period.

Chief Executive
Ivan Menezes,
in an interview with The Wall Street Journal, said demand for Diageo’s brands among middle- and lower-income Americans had yet to rebound, despite signs of the economy improving.

“I’m cautious, I don’t want to call it yet,” he said of a recovery in U.S. spending. “When spending in everyday bars and on casual dining increases, then you will see the whole industry getting a bump.”

Diageo, the world’s biggest liquor company by sales, flagged a slowdown in the U.S. spirits industry just before Christmas and has admitted Smirnoff has struggled in the past year. The brand makes up around 25% of Diageo’s $5.22 billion in annual North American sales but has been hit by price competition and signs that Americans are falling out of love with flavored vodka.

Chief Financial Officer
Deirdre Mahlan
said some former vodka drinkers were now choosing bourbon whiskey instead. Diageo has invested heavily in expanding Bulleit, its one major bourbon brand, and sales are expected to top a million 9-liter cases in 2015. But that is still dwarfed by Beam Suntory Inc.’s
Jim Beam,
which sells nearly seven million cases a year.

Mr. Menezes said Diageo intends to keep increasing Bulleit’s sales but “not feed it and act like it’s a big brand. We want it to stay the hipster’s choice.”

Overall, Diageo said first-half net profit decreased 18% to £1.31 billion ($1.97 billion), compared with £1.60 billion in the year-ago period. Revenue was about flat at £5.9 billion. As in previous periods, Diageo said currency devaluations in emerging markets ate into sales.

Nevertheless, Diageo said the fiscal second quarter’s results improved on those of the first quarter, which cheered investors. The company’s shares were up 3% to 2,022 pence in midday London trading.

Mr. Menezes is in the middle of a cost-cutting program designed to save £200 million a year.

The main focus is areas such as logistics, information technology and supply-chain management, but the company appears to have targeted other budgets as well. Diageo’s first-half marketing spending fell 1% to £896 million, drawing criticism from some analysts.

“Diageo has underinvested in its brands over a number of years and needs a prolonged period of investment to restore brand equity,” said
James Edwardes Jones,
an analyst at RBC Capital Markets.